Labor productivity is the economic output per labor hour. It is different from employee productivity which is a measure of individual worker output. And it is directly linked to improved standards of living in the form of higher consumption.
What is the productivity of labor?
The labor theory of value is commonly attributed to Adam Smith in 1776, but at least 25 writers between 1588 and 1767 published related thoughts. The labor theory of value says that the value of a commodity is determined by what labor was expended in its production. When people discuss labor productivity they are measuring output per unit of labor input.
The labor being measured is labor hours, and labor productivity can be used to compare labor productivity across countries or industries. For instance, labor productivity in labor-intensive agriculture is much lower than labor productivity in labor-saving manufacturing.
Furthermore, labor productivity increases through capital accumulation (moving labor from labor-intensive tasks to labor-saving tasks) and innovation.
What is the average productivity of labor?
So, what then, is the average productivity of labor? It is the ratio of the aggregate output produced by labor (in an entire economy) to the total labor hours used in production, i.e., this includes all the workers, whether blue-collar or white-collars.
In simpler terms, the productivity of labor means the total output that is produced by labor units over one year. It is denoted as PL or Y/L, where L is the number of labor units and Y denotes the yearly output.
Another way of thinking about labor productivity is that it is the efficiency of labor in producing output. It is the amount of labor used in a process, compared to the number of goods or services produced by this labor.
What is the marginal productivity of labor?
The marginal productivity of labor, then, refers to the additional output produced by one more unit of labor. In other words, it is the extra revenue that a company gets when hiring an additional labor force with given capital in the production process.
Research conducted by the Philippine Statistics Authority among Philippine manufacturing firms, who demonstrated a productivity increase in 2000 shows that this improvement was attributed to the introduction of sophisticated technologies which were efficiently utilized by the said firms.
It found out that, "the difference between labor productivity and marginal productivity is that the former measures a rate, while the latter is used to describe an individual output unit."
Furthermore, the same research claimed that the Philippines' labor productivity growth is at 1.1% from 1996-2000 while the average for Asia was 3.4%. However, if you measure labor productivity by output per man-hour worked, the Philippines ranks higher with 631 against China's 515 and Indonesia's 481."
What is a good labor productivity ratio?
Before you go on to the best way, it is important to know and understand what productivity means in terms of labor. Productivity is simply a ratio that describes how much output you can get from inputting something.
As such, a good labor productivity ratio is higher than the average of its respective industry. It is also good if your labor productivity growth rate is greater than the annual industry growth rate.
Moreover, the same paper found out that in the Philippines, labor productivity in manufacturing dropped by 1.3% between 1997-1999. It should be noted though that the decline was attributed to the fact that there were major structural changes at work and these affected both output levels as well as efficiencies.
The best way to improve your labor productivity is simply by improving your efficiency of labor.
What is the importance of the productivity of labor?
The productivity of labor's importance lies in the fact that it is a general indicator of how well your business is doing. Higher productivity levels are usually indicative of higher standards of living for people and also the overall economic health of a country. This means that when countries have high productivity, they can produce much more goods for their inhabitants as compared to low-productivity countries.
With this knowledge in mind, you need to focus on the productivity of labor because it directly ties into the overall health of your business. If you want a healthy business, then always strive to improve productivity levels.
What are the factors affecting the productivity of labor?
The factors that affect the productivity of labor are as follows:
1) The labor force:
Skills and qualifications of the employees will help increase their productivity. For example, if someone qualifies as engineering then they can become more productive at work because they know how best to handle certain situations.
If there are not many qualified people looking for work in your industry, this will hurt your productivity levels as you will find it difficult to fill positions. If everyone has the same skills and qualifications, then this increases competition for similar jobs which can be good or bad depending on how you look at it.
2) The labor management system:
A motivated workforce is more productive than one that is neglected and unmotivated. Therefore the key to productivity improvement is winning the hearts and minds of employees, understanding their needs, and then working with them to find solutions.
Make sure you are aware of what incentives your workers have for being productive e.g. do they get paid by output or by time? If it's the latter, consider introducing output-based pay. Be aware however that this can have a detrimental effect on quality which must be taken into account when deciding whether to introduce such incentives.
3) Think about how you organize your work:
The most labor-intensive industries are usually those with very little mechanization e.g service sector and agriculture. You can organize your teams to find ways on how you can minimize the amount of rework.
4) Consider whether you need to increase the level of mechanization:
Farmers make use of fertilizers and pesticides to dramatically increase productivity. This has come at a high cost however in terms of biodiversity, human health, and long-term environmental damage. Besides, the low levels of mechanization required to run a farm are not desirable in the long run, as it reduces employment and harms economies of scale.
5) Consider whether you need to increase your labor skills:
Hence promotion policies should be designed to promote labor mobility; promoting training activities and investing in education both at the school level and after the education system has passed.
How is the productivity of labor measured?
Productivity of labor can be measured in different ways with there being two main methods used to calculate labor productivity – Multifactor Productivity and Total Factor productivity. The most commonly used way to measure this metric is through the use of multi-factor productivity, this requires at least two inputs for measuring labor productivity.
For example, if a production process was producing vehicles and requires steel and labor as input to produce 1/2 cars per hour then the multifactor productivity would only measure (1/2) cars produced per hour of labor against the total time it takes to produce a car (x) which would normally be zero as labor productivity is said to be in terms of units per hour. This means the input required for a full car is steel and labor; if it takes 10 hours of labor to produce a full car then the output factor for multi-factor productivity per hour is 1/2 cars or (1/10) cars per hour of labor.
This is usually a good indicator as steel prices do not change often and many other factors account for productivity growth in theory: Capital, Labor (skilled or unskilled), Entrepreneurship, Management, etc. These things can all be measured separately but when the output produced is dependent on many input factors then it is not that simple to measure productivity growth.
The second way to measure labor productivity is in terms of the output factor required such as capital, and labor input per unit of output which can be measured by dividing the dollar value of all goods produced by the total dollars spent on both labor and capital for their production.
This type of productivity measurement can be labor input per job (factory output divided by factory labor hours) or dollar value of the product produced per each worker hour, etc.
It is important to include productivity growth in any business plan because it will determine the future profitability of the company and ways that can be used to improve it. A company should have a target return on investment for the term of the plan, as well as a target rate of productivity improvement.
Any labor input can be divided into two components: the first one is job rotation and specialization which reduces production time and increases labor effectiveness; the second – automation, utilization of IT systems for managing business processes and automating some activities.
How to increase the productivity of labor?
There are several ways to increase the productivity of labor. And these include:
- improving its management;
- reducing the use of raw materials and energy resources; and
- increasing labor productivity through automation.
Some companies may think that mechanization is a panacea for all their problems, but this "cure" should be used only when it makes sense. Machines will not work unless they are serviced and maintained, the personnel must be trained to work with them and there should be constant availability of spare parts.
Unfortunately, many managers are too hasty in looking for "magic bullets," trying to solve all problems immediately using modern production technologies, even if these technologies do not fit local conditions.
This means that the decision to use new technology should be based on an objective and careful assessment of all factors that can impact the production process.
Learning how to evaluate properly the costs and benefits of a particular solution will let you avoid unnecessary mistakes in making decisions about using or deploying some technologies.
"Magic bullets" may sometimes fit, but they are often not the best solution.
Ways to Improve Labor and Productivity
There are ways to improve labor and productivity, as well as strengthen your business, using various tools and techniques:
Caring about employees
Good labor relations are key to productivity. In an ideal situation, you will have a healthy working environment that allows people to understand the goals of the company and feel like they are making an impact on it.
Using positive and negative incentives
Using incentives, in general, is great for productivity, especially if they are team-based and not individual-based. The problem here is that you're dealing with people, and incentives may not be the best solution. If used incorrectly, it can create resentment or more problems than it solves.
After all, how much will an employee do for a new car? How many extra hours would they work for a $50 bonus? Although some might take advantage of these situations, many will not and will come to resent their manager for putting them in this situation. This may lead to decreased productivity over time, making the incentive a failure.
A stern talking-to or taking away of privileges can increase productivity when used correctly. It is important for these decisions to be made carefully and with respect, however, just as the use of incentives, this should be considered carefully. Otherwise, a harsh message can lead to decreased productivity in the long run, either because you have broken an important trust or have created resentment in your employee that will slowly fester and reduce productivity over time.
Altering working conditions
While it is true that most employees do not want to spend time working in hot, muggy places that are uncomfortable or cold and drafty there is a limit to how much you can improve the conditions of your workplace without spending too much. If you invest large sums of money into building an air-conditioned factory with comfortable temperature control in every room then this will be expensive but it will probably be worth it.
You can try to alter working conditions in more subtle ways that will still save you money without incurring the costs associated with an air-conditioned factory. One example of this is rotating your employees between jobs regularly so that they are not always doing the same thing.
While it might seem like a waste of time and effort to train an employee only for them to leave shortly after, it can still be worth doing because you will have improved their productivity. This is especially true if the job they are being trained for is a similar one but requires different skills or knowledge than one that they were already good at.
Proven strategies to improve the productivity of labor
To improve the productivity of labor in your company, you can use the strategies below as guidelines:
- You can always look at your current workforce and see what they are not doing or are not being used for effect. This is because even when an employee is happy in their position, this does not mean that they do the right thing all the time. By identifying what they are not doing, you will be able to find a better job suited to them or train them for it and use their skills.
- Can you get the same results with fewer people? If so, this would improve the productivity of labor. This can be done by looking at what you are producing in the company and then taking time to study if the production process is still able to produce the same thing with fewer people. With fewer employees, you will also be able to do away with unproductive or inefficient ones as well, which is a good way of improving productivity in the workplace.
- Can you get more out of your workers? Can you improve their working conditions so that they can do better at their jobs? For example, if a company is in the process of reorganizing, then your employer may require you to do more work than usual. This leads to increased workload and since you have been doing this for a long time already, you are accustomed to it. As these tasks become more familiar, they get easier for you to perform and there is less effort involved when compared with what you used to do in the past.
- Do you always work at maximum potential? a) Have you been neglecting regular exercise due to your hectic schedule? b) Have you been eating and sleeping well enough, or have you started keeping strange hours because of overtime at work? c) Are you taking good care of your general health and wellness?
If you can answer "yes" to at least one of the questions above, then your productivity may be suffering because of it. You might have a hard time doing things that require some extra effort or thoughtfulness, not just because your body and brain were exhausted during work hours but also because they are tired from what you do outside of work.
The term productivity refers to how much useful output we can produce over a given period with our labor or capital. Productivity levels are closely related to economic growth as labor productivity growth is usually the dominant component of total factor productivity growth in developed countries. Labor productivity, which is the ratio of outputs (goods and services) to inputs (labor and capital), is often understood as a fundamental measure of production efficiency.
In conclusion, the productivity of labor is an important factor in the economic growth of a nation. Productivity can be increased, and it is the responsibility of the labor force to help their employers increase productivity to receive fair compensation for the work that they produce.
Labor and productivity share a positive relationship in form of labor productivity growth. Labor productivity is the ratio between output per hours worked and therefore it is telling us how much the workers are producing within their working hours, thus, higher labor productivity means that more work has been done during a given unit of time.
The reason why productivity growth is always considered good is that it leads to higher wages and standards of living for the labor force. Labor productivity growth can be achieved through the introduction of new technologies into an organization or by increasing skills level in employees which can improve organizations’ level of activities and therefore finally increase output. An employee's skills are developed by receiving education, training, experience, and working in a particular job. In general, labor productivity growth is the result of improvements to technology and that raises standards of living for workers.
Frequently Asked Questions
Productivity of Labor is a complex subject. For better understanding, below are some frequently asked questions that could be helpful:
What is the productivity of labor?
Productivity of labor is defined as the ratio of output to labor input, or how much each worker produces in a given period.
Productivity is measured as the value-added per unit of labor input. It is the efficiency with which an economy uses its labor resources in producing goods and services. The productivity of labor can be measured by output per person employed in that sector, in an industry, or the entire economy.
It should be noted that the productivity of labor is different from the rate of technological progress such as inventions, innovations, and discoveries. For example, if a worker produces twice as many units in one hour compared to last year, his/her productivity has increased but unemployment may persist if more jobs haven't been created.
As a rough rule of thumb, labor productivity growth is the major factor that determines whether an economy is growing fast or slow in the long run. Economies with high productivity growth rates usually grow at their potential annual rate while economies with low productivity growth rates usually grow below their potential rates.
How to improve the productivity of labor?
To improve labor productivity, you can increase labor efficiency by reducing unit labor costs and addressing the labor quality issue, and have labor markets that are flexible and provide good incentives to productivity. In countries where labor productivity is rising fast, unit labor costs fall and wages rise at a slower pace relative to earlier years.
You can also improve the productivity of labor through an increase in capital per worker. It includes physical capital like machinery and equipment which produce goods and services as well as financial capital. In theory, better tools make workers more productive, but in practice, it depends on the labor quality issue too.
Employing more efficient technologies and using better labor-management techniques can improve the productivity of the existing workers. Through innovation and technology, labor efficiency can be improved by cutting production costs. In this way, labor productivity improvement helps to reduce unit labor costs. It is also essential to improve the quality of the labor force through education. When the education level of workers increases, they will produce more output from less amount work leading to higher labor productivity and lower unit labor costs.
What are the factors which influence the productivity of labor?
One of the factors that can influence the productivity of labor is technology. It is important to look at how technology can be used in the production process. If there are new technologies that could increase labor productivity, firms will use them and in turn, it will increase labor productivity. For example, a shop floor robot may be introduced to move parts around if moving by hand was taking too much time.
Another factor is that of having a skilled labor force. If the firm is employing high-quality workers they will be able to produce more output with less input. It also depends on the number of people employed within the company, in general, if there are more employees it will cost the firm more in wages and other benefits; therefore there needs to be some productivity per employee when it comes to keeping the overall cost of labor down.
What is the labor productivity of a business?
The labor productivity of a business is a measurement of how much output is produced by the firm per hour worked. It, therefore, measures both the efficiency of production in terms of machinery used as well as the number of employees working for the company.
If a business produces large amounts using less labor than in previous years it can be said that there has been an increase or improvement in productivity. The opposite is also true; if there is no increase in productivity it can be said that productivity has decreased.
Productivity growth is often seen as the key to improving profits and economic progress which results from a combination of improved output per hour worked as well as an increase or decrease in employment levels when compared to previous years.
What is the Labor productivity formula?
The labor productivity formula is used to show the effectiveness of labor in producing products and services compared to other factors including capital.
It is defined as:
Labor productivity = (Output per hour worked) / (Labor input per hour worked).
The formula considers two inputs that go into making a product or providing a service; labor hours and capital equipment, supplies, raw materials, etc.
Labor and Capital are used in combination to produce a product or service, so labor productivity is considered as both a measure of efficiency and effectiveness.
How does labor productivity enhance economic growth?
Labor productivity is not all about the worker. It's also a measure of how efficiently a firm uses its labor to produce output or deliver services.
It is a core driver for economic growth because it determines how much output we get from what we could conventionally call capital - machinery, equipment, buildings, etc., once known as "muscles" or "hands."
Therefore, the productivity of labor can be quantified by using two ratios:
Labor productivity is calculated as follows: LP = output per worker input.
The term 'labor' is a non-specific shorthand, meaning both skilled and unskilled labor. Labor productivity also can be quoted in other units (for example, kilograms or tons per worker hour).
One thing to remember is that labor productivity measures the efficiency of labor - a raw measure of output divided by a measure of input. It does not measure the value-added from other factors such as capital (machinery and equipment) [usually called technological progress] nor in-kind contribution made by other labor. Labor productivity is also not the inverse of the wage rate; a high hourly wage does mean higher labor productivity, but it can be due to several reasons, such as 1) very high productivity of workers compared with another country (e.g. Scandinavian countries), 2) low wages in comparison with others, 3) very short work hours per week.
The labor productivity concept can be applied to farms, factories, offices, hospitals, and almost any other employer of labor. It is possible to measure labor productivity for a particular sector or the whole economy.
Why is labor productivity important in economic integration?
Labor productivity is important in economic integration because the productivity of labor is a key factor for economic growth. If labor productivity rises, the firms will be able to produce more at less cost. This allows firms to raise their revenues and to pay higher wages to employees.
If labor productivity falls, the firm will need more inputs (e.g. capital and materials) to produce a similar amount of output. This will lead to lower revenues, and thus the firms may lay off workers or even completely shut down their businesses if they are not able to cover their production costs with sales revenue.
This is why labor productivity growth rates have a strong impact on employment rates.
How do you interpret the productivity ratio?
You can interpret the productivity ratio through a simple example:
For years, Mr. Smith runs a small bookstore with 10 employees, each producing $50 worth of books in an hour (the output per hour). One year, Mr. Smith hires more workers so now the total amount of books produced is equal to 50*.5*10 =$1000 but still he employs only 10 people therefore output per hour worked is $1000/$100=10.
In the second year, Mr. Smith hires a very intelligent and hard-working person who helps him get more business so he can sell books to customers in the surrounding cities. However, due to his small business size, he still employs only 10 people, therefore now they produce 25*.5*10=$1250, but per hour worked is $1250/$100=12.5.
In this example output per hour worked increased by 2.5 while employment remained constant at 10 people. This increase in productivity can be explained by the fact that the new worker Mr. Smith hired was very intelligent, hardworking and helped him get more business.
The productivity of labor is an essential economic measure that should be taken into account when planning a business or policy change because it shows the number of goods and services produced per hour worked.
Therefore, productivity growth can cause wages to grow independently from labor market conditions, and as we have seen in the example with Mr. Smith: productivity growth can be boosted by working smarter.